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May 17, 2006

Audrey MacLean on Best Practices for Angel Investing

Renowned angel investor Audrey MacLean explored the nuances of angel investing with the audience at yesterday's Women's Angel Colloquium. MacLean, a founder of both Network Equipment Technologies and Adaptive, revealed that her role as private investor was an accidental byproduct of her career in the computer industry.

According to MacLean, no one wakes up and decides to be an angel
investor. She was at Adaptive when a couple of companies that she knew
invited her in to invest, and when they both did well, it established
her as an angel investor. MacLean then fell into being an LP in several
established venture funds, and doing more of her own angel investing.

MacLean has been on the Stanford teaching faculty for the past
eleven years, and she loves it. You get to meet people who are rich in
content ideas, but naive on how to pursue them. MacLean claims to be
the only Stanford professor "that doesn't give a shit about
ideas...There are plenty of ideas, but precious few
opportunities...Good ideas and good intentions are not good enough."

Angels need to rigorously assess the opportunity, not the idea. Good
ideas need the team, the opportunity, and the capital strategy to
succeed. Those who invest well do it with a long term
perspective. They make sure there's a clear alignment between the
founding team and the company's long-term goals. Also, angels should
understand
enough about the opportunity so that they can put rigor into an
assessment, know what it looks like at
scale, and know what it takes to get there.

There are some common denominators across the many flavors of angel
investing - alone as vs. in flocks, passive investor as vs. mentor
capitalist, etc. MacLean also called out the archangels, those like
Paul Allen or Vinod Khosla, who can invest a million now, five million
later, and so on. MacLean reminded the entrepreneurs in the room that
they can find both good and bad investors within any of
the various ranks. Whichever side of the table you are on, you need to
ensure that you're working with people who
share the same values and philosophies as you do.

Effective angels, regardless of what category they are in, need to
help teams assess their capital requirements across time, so that they
can map milestones against their cash burn, and then map that
against their fundraising rounds. MacLean compares this simple math to
scuba diving. How much air is in the tank, how deep are you, and how
much air does it take to get back up? Do you have some buffer built
into your available air time, in case you get stuck along the way?

MacLean asserts that VCs are willing to wait until angels spend the
time and money needed to figure out if something is going to work. So
even in an angel group, angel investors need to do their own thinking.
Do I know enough? Have I acocunted for the unknown variables well
enough to start solving the problem? MacLean thinks that angels should
stay within those areas where they have a good intuitive feel for what
will work. If angels talk about problem-solving and markets, rather
than about technology and product, then they'll understand the
opportunity.

Another question that angels fail to ask: Is the market big enough?
As MacLean stated, if you're in too small a space, then you'll lose the
latitude needed to adjust for market change. And compelling "enough"
means that there is a compelling reason for the customer to pay you for
what you're selling. "It's drinking your own bath water" to think about
compelling reasons to sell it to the customer instead.

Another interesting snippet from MacLean's talk: You always want to
know who the leader of the team is. Who is the original inspiration for
the idea? MacLean wants to know about the moment that the idea
came together, and when the founders just knew that this was the right
thing to do. Why did these people decide to commit their entire
existence to fulfilling this vision? What are these people capable of?
What are they inclined to do? Do they have realistic views about what's
possible? MacLean needs to know that the CEO is going to take the
company all the way during the phase where the company is being willed
into existence, which can take five years or so.

MacLean highlighted the need for a culture where it's OK to disagree,
and where it's OK to talk about your problems. But that's what a
startup is like - one day you can be overcome with dread, and the next
day you know that nothing can stop you. To live through it, everyone in
the company needs to know that you are headed towards a target, and
that there's a plan to get there.

There's nothing accidental about putting together a successful angel
deal. The investment needs to be thought through as something more
mature than it is today. MacLean suggests that angels think about an
investment as a market opportunity with both reach and future financing
rounds under its belt.

During the Q&A, MacLean revealed the more personal side of her
journey into angel investing. One recurring theme was that math is the
great equalizer for women. MacLean found that niche as a way to stand
out as one of ten siblings, and joked that she grew up in a Darwinian
envitonment, where "if you turned your head at the dinner table, you
lost your meat!" Today, she worries about the next
generation of women, who don't understand what the women of barely
twenty years ago had to do to make more equal access
happen.

MacLean also talked about the awards that she used to foster a
culture of participation in all area of the company, tricks such as the
"alligator award" handed out for spotting danger in the water even if
it didn't relate to your job. She passionately avers that there's no
difference between we and
they, since in a startup no one will make it if you don't paddle
together to avoid the falls.

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Audrey MacLean on Best Practices for Angel Investing

Renowned angel investor Audrey MacLean explored the nuances of angel investing with the audience at yesterday's Women's Angel Colloquium. MacLean, a founder of both Network Equipment Technologies and Adaptive, revealed that her role as private investor was an accidental byproduct of her career in the computer industry.